Question

What ROR will an entrepreneur make over a year project period if he invested $90,000 (time) to produce portable X-volt air compressors? His estimated costs are $20,000 per year with estimated revenue of $40,000 per year. (Hint: You can solve with IRR function in Excel OROR-100.0% OROR- 14.9% OROR- 18.0% ROR-78.0% ROR Analysis_Multiple Alternatives Select the best answer to the following multiple choice question Question 18 (6.5 points) The four revenue tomatives described below are being evaluated by the rate of return method, if the proposals are Independent, which one should be selected when the MARR is 18% per year? Alternative investment (S) Overall Rate of Return Incremental Rate of Return (%) When Compared with Alternative 180,000 Select only tematic

Answer 1

He makes an estimated $(40,000-20,000) per year = $20,000 per year

Suppose the interest rate is r, so that the NPV is 0

90000=20000(1/(1+r)+1/(1+r)^2+1/(1+r)^3+...+1/(1+r)^8)

4.5=1/(1+r)+1/(1+r)^2+1/(1+r)^3+...+1/(1+r)^8

1/(1+r)=0.87025

r=14.9%

Thus, b is correct.